Plastics News Daily Report - May 10, 2018 - 64

64 ‹ PLASTICS NEWS DAILY REPORT ‹ May 10, 2018

Slow, sustained growth is positive news

he U.S. economy cruised along
at a comfortable pace in the
first quarter, and the data reported so far for April indicate a
similar performance for the second
quarter.
According to the Bureau of Economic Analysis, real GDP expanded
at an annualized rate of 2.3 percent
in the first quarter. This pace was
moderately slower than the 2.9 percent we experienced in the fourth
quarter of last year. Nevertheless,
the gain in the first quarter was
right in line with the long-term
average rate of overall economic
growth over the past nine years.
There are several components
that comprise the topline GDP number, and some of these components
are more interesting than others
for most manufacturers. When it
comes to forecasting demand for
plastics products, a portion of the
GDP data that is of primary importance are the trends in disposable
personal income and consumer
spending. The chart illustrates the
rates of growth in these data, not
the actual levels.
When compared with the same
period last year, disposable personal income escalated by 2 percent in
the first three months of 2018. This
pace was comparable to the average from recent years, and it was
modestly stronger than the gain of
1.8 percent in the fourth quarter of
2017.
Personal spending, after adjusting for inflation, expanded by 2.6
percent in the first quarter when

PERSONAL INCOMES VS. CONSUMER SPENDING
5

Disposable personal income

Real consumer spending

4
3
2
1
0
-1
-2
-3

2008

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

Sources: Mountaintop Economics & Research Inc., Bureau of Economic Analysis, Federal Reserve Board

compared with the first quarter of
2017. Here again, this rate is very
close to what it has averaged over
the past five years, but it was a little
slower than the rate of 2.8 percent
in the fourth quarter from last year.
To summarize, the growth in the
U.S. macroeconomic data from the
first quarter continued the long,
steady and unspectacular trend we
have seen for the past few years.
The gains in both income and
spending were sufficient to generate solid demand for plastics products in the near term, but they were
probably not sufficient to spur the
overall economy to a growth rate of
3 percent this quarter.
Personally, I am quite pleased
with this performance because it
is sustainable for a long period of

time. In fact, it is quite likely that
by the time the current expansion
ends, it will be the longest period
of U.S. economic expansion on
record. When you consider the
rates of population and productivity growth in the U.S. during the
past decade or two, an economic
growth rate of about 2 percent is
right at this country's long-term
potential. If we stay at this rate, the
probability that one or more major
sectors of the economy will overheat and create a bubble are greatly diminished.
Under these conditions, both
business executives and policymakers can manage and invest resources in ways that optimize longterm benefits. I am not saying they
will always choose to do so, but at

least they have a range of choices
not available during periods of high
stress or uncertainty. Managers in
the plastics industry are acutely aware of the fact that strategic
planning is much more likely to
succeed when cyclical volatility is
low than when boom-and-bust conditions prevail.
The early data available from
April indicate this pace of decent
but unspectacular growth will be
sustained in the second quarter.
The ISM Manufacturers Index came
in at 57.3 for April. This was below
the 59.3 posted in March and was
also a bit below consensus expectations, but it was still well into
positive territory. Manufacturers
reported slower gains in new orders, production, and employment
levels. After hitting a peak in the
first quarter, manufacturers' plans
for capital expenditures cooled
slightly in April.
Total vehicle sales also slowed
in April to an annualized rate of
17.2 million units. This was right
in line with the gradual decline in
this data of the past few months. It
is worth noting that a gain in sales
of light trucks was offset by a sharp
decline in sales of passenger cars.
Rising interest rates are clearly evident in financing costs. The average monthly payment for a new vehicle in April was $535, which was
up 5 percent from the same month
last year.
Based on the data I have so far,
my current forecast for real GDP
growth in the second quarter of

this year is 2.7 percent. Personal
income and spending in the second quarter will both expand at a
rate that is near their respective
long-term averages. Vehicle sales
will continue to decline gradually,
and demand for most other types
of manufactured goods will stay
positive, but it is not expected to
accelerate.
Under most circumstances, I
would expect this to be a gratifying outlook. However, many people
came into this year expecting faster
rates of economic growth resulting
from the reform. We were promised
real economic growth of at least 3
percent. From a political perspective, growth of 3 percent is an easy
sell because it is the rate needed to
generate enough tax revenues to
pay for all the deficit spending.
This may still happen. I think we
can get to 3 percent growth in real
GDP this year, but it will be a challenge based on the data we have
so far. And there is another factor
starting to emerge: The rate of inflation looks poised to rise above
2 percent sooner than many policymakers expected. This will push
interest rates higher, which in turn
could have a dampening effect on
economic growth.
Asset bubbles, rising interest
rates and high inflation are the dangers incurred when the economy
is stimulated to grow faster than
its long-term potential. If we want
long-term growth that is faster than
2 percent, then we must raise productivity growth. To accomplish
that, we must invest in our workforce and our capital structure
persistently, extensively and judiciously.

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